By Cathy Odgers*
The first problem I have with Labour's Tax Policy is the implementation clause which is very fundamental to the process.
Here's what Labour says in its policy released today.
The CGT will be forwarding-looking and only apply to gains accrued after implementation. Past gains will not be affected.
The transition will involve a ‘valuation day’, or ‘v-day’, whereby all capital gains prior to v-day are tax-free; those after v-day subject to tax. This approach was taken by Canada, the United Kingdom and most recently, South Africa (which undertook a detailed study of international practice to inform its policy design decisions).
This approach avoids penalising people for investment decisions they made during a period when there was no CGT. It also does not disadvantage other people (especially younger people) or create lock-in incentives or avoidance opportunities by exempting future capital gains on currently-held assets.
Australia’s approach of grand-parenting increases ‘lock in’ and complexity by creating avoidance opportunities through shifting value from post-CGT to pre-CGT assets. This has in turn increased the complexity of the Australian scheme.
The Expert Panel will provide advice on the implementation and operation of a valuation day system, including issues such as pragmatic valuation methods for assets not easily valued. The final approach adopted will need to be practical and flexible, such as the South African approach where taxpayers were provided with a choice of methods for valuations, some of which were relatively simple proxies for full market valuation.
Labour have happily called this V-Day. Which has connotations of course dating back to World War II. Ironically it is the baby boomers already cashed out who will suffer least among the Labour CGT regime especially with the property and asset price rises in the past decade.
There is even a baby boomer exemption for tiddly sized businesses:
Small business assets, up to a maximum of $250,000, sold for retirement, where the owner is above a certain age (e.g. 55) has held the business for 15 years and has been working in the business, will be exempt. This means that those who have saved through investing in a small business will not be negatively disadvantaged.
Apparently Labour do not wish to be "penalising" people for investment decisions made when there was no CGT. Problem with this language is that it is penalising people for investment decisions by inference when there is a CGT.
I also say what investment decisions? There are so few exemptions and moreso very unusual exemptions, that investment decisions must surely stay the same as before. Property driven.
In the past many groups have looked at CGT and decided it might be a good idea, then nothing specific has been done in New Zealand. Take for example in 1987 when ironically again Don Brash and his team reported to Sir Roger Douglas about the Brash Report "Comprehensive Tax Reform and Possible Interim Solutions June 1987".
Our own strong preference would be a comprehensive capital tax on all capital gains (where income or capital) properly attributable to New Zealand residents at an internationally competitive rate (perhaps 25-30%). We believe that most taxpayers would readily accept the tradeoff between a much more comprehensive definition of income for tax purposes, and a lower tax rate. The tax regime would need to be pragmatic and simple to operate rather than theoretically pure. It should be flexible and adaptable, to cope with a rapidly changing business environment.
Here capital gains has been discussed but only with a trade-off of lower taxes. Again remembering giving politicians the option of new taxes is like leaving alcoholics overnight in a brewery.
Members of that committee included Brash, Paul Bevin, Dr Robin Congreve, Dr Geoff Harley, Dr Keith Sutton and Arthur Valabh.
Let me focus on one of those committee members, Dr Congreve who has an estimated wealth now of around $110m. Good on him. As a lawyer he didn't earn such a princely net wealth billing time. No, his investment interests were private equity and real estate. Would Dr Congreve for example have been happy paying 25-30% of his wealth in capital gains for every deal? I doubt it. How many of that committee live in million dollar homes and have a spare home that would have been subject to CGT if it was around when property prices in Auckland skyrocketed?
Then we have the show-boating Gareth Morgan (and to lesser extent his successful entrepreneurial son Sam) harping on about capital gains and how they didn't pay a cent when Trade Me was sold. Morgan Sr. has written ad nauseum about CGT. Problem is I don't see a large cheque from Morgan to the NZ consolidated fund for any voluntary taxes. No, he would rather donate directly to charities of his choice. And why is that? Because Morgan doesn't trust the government to even spend his charity dollars better than he can. Yet he wants other people to happily part with CGT on the sale of their own Trade Me's.
Even in my twenties when I wasn't earning enough money to have any assets, I voted aspirationally, therefore I look at where I want to be and consider how I want to be taxed when I get there.
Labour's CGT punishes young people trying to get ahead and it encourages voters not to vote aspirationally but to vote on the basis of envy of their neighbours and peers. It pits those who wish to be millionaires versus those who already have substantial cashed out assets.
Capital Gains Tax is Labour's way of dividing the country into those who have aspirational goals versus those who wish to take away the wealth of others because they have either achieved their own goals or worse still have none in the first place.